Economics is About People, Not Money

Capital and combinations

by Gwydion M. Williams

If it takes one man ten days to dig a ditch, how long will it take ten men? School mathematics says “one day”, but this is definitely wrong. Ten men should be able to work together and do the job in much less than a day. Badly organised, they may also get in each other’s way and take much longer.

Marx in Das Capital gives a brilliant elaboration of the world as it would be if ten men would automatically take one day to dig what one man could do in ten. This simplified case gives many deep insights, just as physicists construct simplified models of the world so as to understand what is going on.

Newton explained the solar system by pretending that planets had all their mass concentrated at a single central point. He then explained the tides by remembering that this was just a simplification. And both answers were astonishingly right. Explaining the detailed motions of the moon was harder, Newton failed to get a precise solution, a point which the standard histories skip over. But later mathematicians culminating in Laplace got a workable solutions that accurately explained the moon and also showed that worrying irregularities in the motions of Jupiter and Saturn would resolve themselves over time. (Thus removing the Divine Intervention that Newton had supposed to be necessary for the long-term survival of the Solar System.)

Celestial mechanics on the Newtonian model were complex but accurate. It was only when it came to very detailed measurements of the planet Mercury that Einstein’s revised view of gravity made any visible difference. Likewise Karl Schwarzschild was able to think coherently about Black Holes by making the unrealistic assumption that they did not spin. Later work showed that things remain much the same if you can overcome the horrendous mathematical complexities of Black Holes that do spin. And so it is in almost all cases.

You can also have senseless or misleading models of the world. Like the American military model of the Vietnam War, which told them in 1969 that they must have won in 1965. Or the treasury model of the economy, which led Norman Lamont to talk so confidently of ‘green shoots of recovery’. The model had in fact worked well up until that point. But unfortunately for Mr Lamont, the real world picked that moment to show a depressing ignorance of basic economics. Rather, the model was exposed as a half truth. A common problem known to physicists but ignored by economists.

Most mathematical economics is based on work of this sort totally senseless models of the world. You can get a feasible model if you assume that people interact as “economic agents” possessed of unlimited knowledge and calculating skills, and also an utterly cold and selfish view of their fellow humans .

An utterly cold and selfish view of their fellow humans is very rare. A few psychopathic killers. A few investment bankers. But by no means all of either category.

You could get very nice analytical models by assuming that all of the world’s battles had actually been fought by chess pieces. Neat and simple. Just not very accurate.

Real-life economists waste their time in solemn discussions of models that are a great deal sillier than re-fighting the Battle of Waterloo under the rules of Chess. Paul Ormerod’s Butterfly Economics represents a more realistic approach than the norm, in as much as he does recognise that people do change their behaviour in reaction to what they see other people doing. Discussing matters such as whether newly released films will flop or succeed, there is some truth in the model. Though it does seem odd to treat The Full Monty, a gentle sex-comedy that appealed to women celebrating their new freedom, as if it were likely to appeal to the same audience as that notably violent and unsuccessful Western, Heaven’s Gate. He might also have mentioned the widespread opinion that Heaven’s Gate was unpopular because it gave an accurate picture of mutual destructiveness and basic injustice in Western settlement, rather than the sentimentalised tosh with pleases the typical audience.

But this is the sensible side, a notion that could be refined to produce something meaningful. One whole chapter of Butterfly Economics is devoted to ‘family values’. The man seems to think that marriage is mainly related to the fact that “many household tasks can be performed with greater overall efficiency if they are carried out on a larger scale” and “the quality of children produced by the couple will, it is argued, be maximised if one of them focuses on bringing up children, gaining expertise over time and hence performing the task more efficiently.” The economists engaged in this learned discussion either don’t realise or don’t care the old-style extended family of couples supported by grandparents and relative would have held solid, had such shallow economic factors been a major factor regulating marriage.

The ‘efficient’ employment policies that moved allowed young people to move away from their home towns and family influence – sometimes compelled them to move against a strong desire to continue their traditional way of life – is surely a factor in undermining marriage as it once was. As well as a contributor to sex before marriage or outside of marriage, as well as much more adventurous sex between married couples and a much reduced willingness to tolerate a cold dull relationship where all the romance had faded. But economists seem adept at not asking the questions that will give them answers they would not wish to hear.

Economic theory is a rationalist theology. Mediaeval theology specialised in producing fancy justifications for behaviour that was blatantly against the original doctrines and practice of Christians. The modern equivalent are dedicated to the notion than nothing happens because of political and social struggle, nor because of bitter fights to define and redefine how people think about themselves.

Mr Ormerod guards against possible Feminist criticism by saying “to avoid accusations of gender bias, we might imagine the allocation being made at random as to who worked and who stayed at home”. In an analysis that is supposed to explain the decline in marriage since the 1960s, he throws away most likely and well-known factor, the ‘gender bias’ that has grown very much weaker since the 1960s, yet remains a strong factor that any serious analysis should take account of.

Up until the 1960s, there was considerable social pressure on women to marry rather than seek jobs. Much more on women to stay at home once they were married, even where there were no children to care for. Much ridicule of those few men who dared to do ‘women’s work’. Also men mostly assumed that they would be the lord and master of the household if they did marry, it wasn’t always so but it was taken for granted in most of the society that it ought to be so.

A study of marriage that throws away ‘gender bias’ is not equivalent to supposing that the Battle of Waterloo was fought under the rules of Chess. More like a learned analytical discussion how things would have worked out had Wellington and Napoleon spent the day dancing the tango with each other!

***

It’s a great pity that Marx followed up just one side of Adam Smith’s work, the abstractions of Smith’s Labour Theory of Value. The Wealth of Nations begins with something much more significant, the Division of Labour. Not that ‘division’ is a good name for it. Ten or more men doing obscure things to bits of wire would make no sense at all unless you realised that pins emerged from the process at the end of the day. Nor would pin-making make sense unless there were the means of transporting the finished pins all over the country – indeed to foreign countries – and a sophisticated distribution system to allow pin-users to get hold of them.

Specialised production, transport and complex distribution – surely this means markets? Not necessarily. Adam Smith ignored the complexities and simply said that it could only happen by selfish impulses regulated by trade. And yet the most sophisticated webs of specialised production, transport and complex distribution were the armed forces of his day, where everything was regulated and market freedoms played no part at all.

***

The idea that what was developing was a capitalist system goes back at least to Thomas Hodgeskin’s Labour Defended Against the Claims of Capital (1825). The role of capitalist is older, but not that old. It was originally one who invests funds in someone else’s industrial plan. Such investments served as a means whereby doubtful and often unsuccessful new ideas could be tried. It was only later that the term grew to include any commercial enterprise, with money assumed to be the driving force.

But most commercial enterprises are not driven by money. They have to conform to the rules of capital accumulation, especially if they are ‘public’ companies with shareholders to satisfy. But this is only one aspect of the complex social and legal framework within which an enterprise will operate. And most successful managers are overwhelmingly interested in whatever it is they are doing, with money as a secondary consideration.

Henry Ford was not a capitalist. He did need capitalist investors at one stage in his career. But as soon as he was successful enough he paid them off and returned Ford Motors to its roots. A hobby for a mechanically-minded man, whose career as an unimportant and not very prosperous rural repairman had taught him how to make a little go a long way.

New Right politics are built on the assumption that public spending is always a burden on the society and that private ownership never is. Their ideas have the clarity and simplicity of sheer lunacy.

New Right policies have inflicted some surface damage on the very successful Keynesianism that emerged from the Great Depression. The visible economic success of both Fascism and Stalinism meant that Western Liberalism had to get its act together or perish. “Liberalisation” in the 1980s has not raised the overall rate of growth, it has in fact slowed it compared to the norm between 1950 and 1975.

The sudden lurch towards economic disaster in the Crash of 1987 ended any possibility of a real abolition of Keynesianism. It was one thing to insist that the market knew best when the establishment liked what it was doing. Easy to cal it perfect when it was taking money away from the poor and giving it to a rich stratum that included politicians and media people. Quite another thing to obey the market when it suggested that the whole economy should contract. Contracting the economy was good enough for East Asians in 1998, but not for Americans and West Europeans in 1987.

***

Economic growth need not be expressed in terms of ownership, let along specialised form called “capital”. Leninist politics were a disaster, fractious and prone to make deadly enemies of people who would agree with them on most issues. But socialist economics as applied in the Soviet Union was highly successful, with a backward fringe of Europe becoming a superpower, as it had never been before.

Khrushchev tried to combine Leninist politics with Western economics – much as the Chinese were to do under Deng Xiaoping. But whereas the Chinese copied the actual practice of successful economies, Khrushchev and his faction took literally the ideas of Adam Smith. They introduced markets, in the belief that they would be naturally self-regulating. They naturally self-regulated the Soviet Union into a long decline.

If you point out that Soviet industrialisation from the 1920s to 1950s disproves the New Right dogma that growth comes only from market forces, they will generally switch ground and say that it was morally unacceptable. Now it is not a logical argument to say that something you regarded as impossible was achieved by immoral means. If a severed human head were able to live and think and carry on as normal, one would need to seriously revise one’s ideas of human life. And this would be true whether or not one considered life as a disembodied head to be a moral option.

Besides, why are the methods used to built the Soviet Union regarded as morally unacceptable, but the methods used to build Western Europe morally OK? Labour camps intolerable but workhouses and colonial chattel slavery perfectly OK? A careful look at New Right ideas convinces me that their moral conscience comes with a convenient on-off switch!

In the same manner, the Ukrainian famine is held to discredit the Soviet experience, whereas the Irish potato famine is held not to discredit Victorian England. And this despite the Soviet Union facing a whole mass of internal and external threats, not least the prosperous farmers who were destroyed by collectivisation, whereas Victorian England in the 1840s was as powerful and secure as any state could hope to be.

Leninists have mostly misread the lessons of history. Stalin is blamed, mainly because Khrushchev used the highly disciplined system built by Stalin to declare Stalin guilty. Yet Stalin in 1917 had been in favour of the Bolsheviks remaining a left-wing opposition party, while Lenin and Trotsky insisted on a coup and one-party dictatorship.

Stalin was no more prone to dictatorship than Margaret Thatcher was or Tony Blare now is. Maybe less so than Richard Nixon, who saw more enemies than he actually possessed, and was prone to massive overreaction that hurt his own cause. The significant difference was that there were checks and balances and centres of legitimate opposition in traditional politics which were absent in the Soviet system.

If I now see more merit in political Liberalism than I did in my Leninist past, I also see far less merit in economic Liberalism. I am also confident that both systems are mere excuses for what people were doing already.

If you ignore the stated arguments and look at the actual outcomes, it becomes obvious that these characters are not seeking the morally correct answer. The very reverse, they are seeking earnestly to avoid it whenever the outcome would not suit their own perceived self interest. And it’s not even a very enlightened self-interest. A pig-ignorant and short-sighted self-interest, in fact.

I agree that many of the same faults can also be found in Leninism. As a protest against mainstream middle-class values as they were in the nineteen hundreds, it shares many of the same defects. Leninist politics denies that there can be such a thing as legitimate disagreement. A view that one also finds right across the political spectrum, with politicians and editors often preaching repression in the name of liberty, yet they can do no more than preach. Whereas the new-born Soviet state soon stripped away what protections there were for legitimate disagreement, with predictable results. Anyone who seriously opposes your own line is a monster and a traitor. Stalin was more flexible than most, recognising that potential enemies could be used before being discarded, which is why he was able to rule while Trotsky could only protest.

The Soviet Union had a successful socialist economic system and a bad inflexible system of party dictatorship. But from Khrushchev right down to Gorbachev, the ruling party leaders persisted in trying to throw away the socialism and keep the dictatorship.

The simple-minded application of New Right ideas to Russia after the fall of the Soviet Union was even more of a disaster. Whereas Eastern Europe is undergoing a painful reorganisation as a hinterland to the highly regulated and protectionist European Community, Russia was run on the assumption that money bred prosperity.

Money does not breed prosperity. Money without social regulations breeds mafias and social disintegration.

***

You can if you like view anything as a capitalist exchange. You might pay yourself for cooking yourself breakfast. Or a man might pay his wife – or a working wife pay a stay-at-home husband. But this would be bizarre, just as identifying all industry and commerce is bizarre. The New Right model works by assuming an absence of social relations to be the norm. It treats the separation of work from the management of work and both from ownership of means of production as if it were the norm.

In football, or chess, or any other game, people interact according to definite agreed rules. But they do not play in order to obey the rules. The rules are needed for the game to work. Various games restrict what can be done, so as to get a better game

In a complex productive economy, many different games are played. Return on capital is one possible set of rules, with ownership not questioned if legal. Nor commonly questioned if the crime is sufficiently old or distant. Conan Doyle is supposed to be the epitome of social respectability. But in one of his stories, an Australian gangster and killer has settled down as English gentleman, but comes to Sherlock Holmes’s attention after killing a man who knew his true past. Holmes helps cover up the crime, on the grounds that the children of the killer and his victim are now part of the gentry, happily ignorant of where the money came from. And the reader is obviously supposed to assume that this was the right thing to do.

This is not an isolated case – which must be why I have never seen anyone else comment on it, or the other times when Mr Holmes shows an odd sense of justice. It was all part of the social norm. The British gentry hijacked the slave trade and ran it even more cruelly, with slaves torn from Africa and worked to death in the sugar islands of the West Indies. They also used the Royal Navy as ‘muscle’ to prevent Imperial China stamping out the opium trade. Opium that was grown by the East India Company and then sold to British merchants who smuggled it in through safe harbours like Hong Kong. And British rule in India had itself been established by methods that shocked the un-tender consciences of Georgian Britain. Both Robert Clive and Warren Hastings got tried, though a ruling class that had profited from their misdeeds ended up acquitting them.

Looking further back, the archetypal bourgeois Daniel Defoe glorified piracy in Captain Singleton. People manage somehow to overlook this, while being shocked that he took a matter of fact view of prostitution in Moll Flanders.   But Defoe was typical of the whole breed in valuing financial success above honesty to Christian principles, or any principles at all. Captain Singleton, like Defoe himself, operates within a corrupted version of the Puritan ideal. When he wants to come home and take up a respectable life, he duly and piously repents — but also keeps the loot.

Defoe follows the British ruling-class norm in regarding the successful entrepreneur as “making money”, a magician who summons something out of nothing. Even when it is visible theft of pre-existing wealth, as with Captain Singleton. The thief who steals overseas and spends the money in Britain is OK. I doubt if Sherlock Holmes would have been as tolerant of a robber who had robbed banks in Britain and then used the loot to set up a grand estate in Australia!

***

Was it this sort of cynical accumulation that made Britain great? Not necessarily. The key changes were firstly the scientific revolution of the 16th and 17th century, in which Britain was only one contributing nation.

The other remarkable change was the sudden European domination of all the world’s oceans. No such thing had happened before, land Empires had sea-born extensions, but as a secondary matter. Yet the rise of Europe’s oceanic power was pioneered by the Portuguese and Spanish, who by an accident of geography were heirs to both the Mediterranean and near-Atlantic heritages of ship buildings.

Britain was mostly successful in hijacking what the Portuguese and Spanish had pioneered. Its success was not based initially on industry, and still less on ‘freedom’ – not unless you rig the definition so that Britain is bound to score top marks. Britain in the 18th century was a keen slave-trading nation, and an enthusiastic exterminator of native populations wherever its own type of people could be placed. (This included Ireland, as well as North America, Australia etc., though the Irish enterprise was to fail and fall to a native resurgence.)

The British economy was 50% bigger in 1740 compared to 1700, and 150% bigger in 1800. This was an epoch of industrial growth, of course. Industry and commerce were 79% bigger in 1760, nearly 300% bigger by 1800, whereas agriculture grew a mere 43% in the same period. But the real expansion was in government and defence, three times as large in 1760, twice that again by 1800. A 500% growth in the state sector compared to 1700, in the very era when the Industrial Revolution took off. (Page 27, The Age of Manufactures by Maxine Berg, Basil Blackwell 1985. I have rounded the figures given.)

When the state sector is the fastest growing thing in an economy, it is perverse to say that it is irrelevant to that economy. Even more perverse to say that the spectacular success of Georgian Britain came despite a tax-and-spend state that was eager to promote modernisation. Adam Smith said this, but did not necessarily believe it and certainly did not act according to his own formal doctrines. He had no qualms about ending his days as a Commissioner of Customs, part of the state machine that he seemed to be condemning in his writings.

Adam Smith’s dogmatic idea that state expenditure was waste expenditure comes from irrationally scaling up a single household to the size of a national economy. A household may prosper by working and saving and spending as little as possible. Or it may ruin itself by spending on borrowed money. But only because it is a very small entity within a much greater whole.

If all of the households in an economy saved half of their earnings, then there would be no one to buy their goods. Saving means buying less, so that less goods are wanted, and less work required to produce them. So earnings fall, which leads all households to save even more and depress the economy still further. Deflation, a process which has so far been contained in the West even as it is encouraged in East Asia.

***

The British bourgeoisie developed analytical thinking in a rather fragmented society where controls were uncertain and government was a matter of negotiations. This worked out well in science, and also warfare, where analytical methods were picked up by military stratum and by the aristocracy.

Analytical methods were also applied to religion and law. Theology was used to justify the obviously invalid process whereby the anti-commercial and pacifist creed of the early Christians was made fit for a commercial and militaristic society. This trend began within Catholicism but was taken up and developed by Protestants, with the original idea of getting back to simple Christianity lost in a mass of logic-chopping.

Based on a belief that these manipulations were meaningful, law found it convenient to endorse this, to conceal its own profound subversion of the traditional order. The lawyers probably believed their own nonsense, else they would have known that history could not be cheated and that the ruling class would not survive unchanged if it undermined the way of life of the people it was ruling.

“Trust me – I’m a lawyer” is not a phrase you’re very likely to hear. Yet otherwise intelligent people will talk as if the manipulations of legal formalities was better able to produce justice and fairness than politics could manage.

The same applies to the ‘free’ market. Not that it is ever truly free, merely free within a defined human framework. Capitalism ignores actual production and concentrates on the manipulation and complication of ownership. A distancing of ownership, control and management. all three separated from the work itself.

Capitalism is all about manipulation of ownership, regardless of whether society as a whole benefits. Adam Smith decided that there was a philosophical necessity for the two to be identical. He therefore had to ignore many existing facts, improvement not based on self interest and improvement mediated by state power.

When ownership is perceived in capitalist terms, there will be a bias towards expanded production. The extra wealth need not be shared with anyone except the owners of capital. Wages and taxes etc. are then perceived as a burden, to be reduced as far as possible.

Likewise the effect on the wider society is not the capitalist’s concern. Only the tendency to expand production is really new. Exploitation and destruction have been features of most human societies.

Money talks. It also craps.

 

First published in Labour & Trade Union Review, 1998

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